Your Auditor May Want to Know.
After close to six years, the Affordable Care Act (ACA) has matured into the massive regulatory behemoth we always feared it would be. After some fits and starts, including delays and transition rules, 2016 marks the first year of largely full-blown compliance.
Guess what? Your auditors know that and they will likely want assurances that you have policies and procedures in place to protect your organization from the excise taxes that can apply by failure to meet the employer mandate. Of critical importance is the so-called “nuclear” or Tier I penalty that applies if minimum essential coverage (MEC) is not offered to at least 95 percent of full-time employees (FTEs) and their biological and adopted children. For 2015, the bar was set at 70 percent, a threshold few companies had difficulty exceeding.
Lockton comment: We discuss the ins and outs of the employer mandate in our Spring 2014 Compliance Newsletter. The rules we touch on below are discussed in greater detail in that newsletter.
For 2016 and for future years, the bar is set at 95 percent. In other words, if an employer does not offer MEC to more than five percent of its FTEs (as defined by the ACA) in a month, the Tier I penalty applies. The annual Tier 1 penalty amount is $2,160, and it accrues on a monthly basis ($180/month), multiplied by each FTE of the employer, including those FTEs who were offered coverage (but the first 30 FTEs are disregarded in the penalty calculation). Because the penalty is an excise tax, it is not deductible when calculating corporate income taxes.
Example: For 2016, the ABC Company intends to offer at least MEC to its 200 ACA FTEs. Due to an unfortunate confluence of events (HR staff turnover, administrative system failures, etc.), for the month of June 2016, it only offers coverage to 185 of the 200 full-time employees (185/200 = 92.5 percent).
ABC owes the Tier I penalty for June, and future months, where it does not meet the 95 percent threshold. For June, the excise tax amount is $30,600 ($180 monthly penalty times 170 FTEs (that is, 200 FTEs minus the first 30 FTEs).
Even if an employer satisfies Tier 1 of the employer mandate, and avoids its massive penalties, to avoid all employer mandate penalties it must also satisfy Tier 2 of the mandate, which requires the employer to ensure that each FTE is offered, at least with respect to the FTE alone (i.e., employee-only coverage), coverage that has at least a 60 percent actuarial value, and is considered “affordable” to the FTE. Coverage is considered affordable if does not cost the FTE more than 9.66 percent of his or her household income. Because employers won’t know an employee’s household income, the IRS offers employers several “safe harbors” within which it may price its offer of employee-only coverage, to guarantee compliance with Tier 2.
[pullquote align=”full” cite=”” link=”” color=”” class=”” size=””]If your organization is vulnerable to ACA penalties, your auditor may require that you estimate and accrue for them.[/pullquote]
Not surprisingly, your auditors may request assurances from you that you have internal controls in place to prevent this train wreck. Examples of internal controls may include:
- Monitoring compliance with the employer mandate on a monthly basis to ensure the 95 percent threshold is achieved.
- Properly tracking hours of variable hour and part-time employees to ensure they are offered coverage if they average 30+ hours over their designated measurement period.
- This includes accurate timekeeping systems that ensure compliance with ACA’s complex rules about averaging hours for employees who are on certain unpaid leaves, including FMLA and military leaves, as well as termination/rehires.
- For employers that intend to offer affordable coverage, ensuring the cost of single coverage meets one of the safe harbors (cost is no more than less than 9.66 percent of mainland federal poverty level, rate of pay, or year-end W-2 pay).
- When calculating affordability, employer health plans that offer wellness incentives must, as a general rule, assume that all employees fail to meet any criteria for both outcomes-based wellness incentives and participation-based incentives, such as incentives to complete health risk assessments, etc. In other words, affordability will be determined without taking into account any wellness-related incentives available to or even offer wellness incentives need to determine. Importantly, however, just the opposite approach applies for incentives for not using tobacco; for affordability calculations, the employer assumes no employee uses tobacco (i.e., everyone qualifies for the incentive, even those who smoke). See our Alert of Dec. 29, 2015.
Employers that rely on a contingent workforce are likely to face special scrutiny. This includes employers that use independent contractors and workers supplied by staffing agencies. While the employer mandate does not apply to persons who are independent contractors, it would apply to individuals who meet the ACA definition of being the employer’s FTEs but who are misclassified as independent contractors. Employers face a similar issue if they use labor from a staffing agency and a regulatory agency determines these individuals are really common law employees of the client company, not the staffing agency.
Lockton comment: A provision in the employer mandate regulations is helpful to the client company in the latter situation. If it turns out that the client company is the common law employer of these workers, the staffing firm’s offer of coverage to these workers is treated as being made on behalf of the client company. Importantly, in order for this treatment to apply, the fee that the client company pays to the staffing firm must be higher in the case of a worker who is enrolled in health coverage under the staffing firm’s plan. Not surprisingly, your auditors may want assurances you have, in your contracts with staffing agencies, provisions requiring them to offer coverage to staffing associates placed with your firm – at least if there’s a chance they’ll be working full-time hours for you – and that they’ll charge you a bit more for those who take the coverage.
What’s to be learned from all this? We’ve cautioned employers for some time about the need to establish measurement, administrative and stability periods, properly classify new hires, track hours of service, and so on. Many capable vendors are able to automate and track compliance with ACA requirements. Now those requirements are taking on added importance as employers’ audit firms are insisting on evidence that the employer has been adequately observing these myriad and complicated requirements.